Wirraway
16th Mar 2004, 07:43
Tues "Australian Financial Review"
Air pockets rock Qantas, Virgin Blue
16/3/04
The tragic events in Madrid last week have shown once more just why airline shares often trade at a discount to other sectors of the stockmarket.
Qantas and Virgin Blue have both shed value since the bombings in Spain's capital killed 200 people. The terrorist attacks sent airline stocks around the world into a downward spiral, dampening the optimism of the past few months.
"Airlines deserve a discount, given the volatility in their market,'' said 452 Capital fund manger Peter Morgan , who does not hold either airline stock at the moment.
He reasons that Virgin Blue has too much gearing for his investment criteria and Qantas is just too pricey.
Australia's biggest airline is trading at 9.9 times forecast earnings, compared with rival Virgin Blue, which, with its low-cost model, trades on a higher forecast earnings multiple of 15.6 .
But Mr Morgan, while admiring the management of Virgin Blue, is of the view that the fledgling airline has to cut its debt before he will buy in.
"Airlines eat up so much capital, I'd like to see Virgin's gearing a bit lower,'' Mr Morgan said.
Theoretically, Virgin Blue should be the best placed in the Australian market if the aviation industry is headed for another difficult period. Its cost base is lower than Qantas, it has a minimal exposure to the international market and the airline is far more nimble than its larger rival.
Virgin Blue had an operating margin last year of 16.74 per cent, compared with Qantas on 5.64 . And while the Brisbane-based airline produces only marginally more revenue per employee than Qantas, its net income per employee is more than four times higher.
But even though Virgin Blue has been an amazing success story, taking 30 per cent of the Australian market in just three years , fund managers are of the view that things are about to get a whole lot harder because of the reinvigorated Qantas.
"They have had an easy run and have found it easy to catch Qantas on the hop,'' said Deutsche Asset Management fund manager Shawn Burns.
"But it looks like Qantas is improving and things are now looking pretty even between them.''
It is too early to tell yet how much market share Qantas will be able to steal back from Virgin Blue when its own low-cost carrier, Jetstar, starts up in May.
Regardless of Jetstar, though, Qantas's mainline business seems to be getting better at getting on the front foot with Virgin Blue.
Last week was particularly tough for the airline founded by Richard Branson.
On Monday the Bureau of Transport and Regional Economics released its on-time performance data for the nation's airlines.
The results surprised the market by showing that Virgin Blue the airline that had pushed so hard for performance data to be released had actually slipped behind Qantas for the month of January.
Credit Suisse First Boston believes the drop in Virgin Blue's on-time performance compared with Qantas is a concern if it wants to increase its share of the high-margin business market.
Just as Virgin Blue appeared to have reassured investors that its slide its in-on time performance was a one-off occurrence, a problem with the airline's maintenance record system reared its head again.
Virgin Blue has voluntarily agreed not to register any new planes and suspend its extended-range twin-engine operations until the issue is sorted out.
That leaves it with one new plane on the ground unable to be certified to fly and more aircraft are on the way that will be similarly affected.
Both Virgin Blue and the Civil Aviation Safety Authority have gone to great lengths to assure the travelling public that the problem is not causing any safety issues for the airline.
But the negative publicity, coupled with a much stronger rival in Qantas, could be a sign that the rampant growth in domestic market share that Virgin Blue has experienced in the past few years will be much harder to achieve in future.
===========================================
Air pockets rock Qantas, Virgin Blue
16/3/04
The tragic events in Madrid last week have shown once more just why airline shares often trade at a discount to other sectors of the stockmarket.
Qantas and Virgin Blue have both shed value since the bombings in Spain's capital killed 200 people. The terrorist attacks sent airline stocks around the world into a downward spiral, dampening the optimism of the past few months.
"Airlines deserve a discount, given the volatility in their market,'' said 452 Capital fund manger Peter Morgan , who does not hold either airline stock at the moment.
He reasons that Virgin Blue has too much gearing for his investment criteria and Qantas is just too pricey.
Australia's biggest airline is trading at 9.9 times forecast earnings, compared with rival Virgin Blue, which, with its low-cost model, trades on a higher forecast earnings multiple of 15.6 .
But Mr Morgan, while admiring the management of Virgin Blue, is of the view that the fledgling airline has to cut its debt before he will buy in.
"Airlines eat up so much capital, I'd like to see Virgin's gearing a bit lower,'' Mr Morgan said.
Theoretically, Virgin Blue should be the best placed in the Australian market if the aviation industry is headed for another difficult period. Its cost base is lower than Qantas, it has a minimal exposure to the international market and the airline is far more nimble than its larger rival.
Virgin Blue had an operating margin last year of 16.74 per cent, compared with Qantas on 5.64 . And while the Brisbane-based airline produces only marginally more revenue per employee than Qantas, its net income per employee is more than four times higher.
But even though Virgin Blue has been an amazing success story, taking 30 per cent of the Australian market in just three years , fund managers are of the view that things are about to get a whole lot harder because of the reinvigorated Qantas.
"They have had an easy run and have found it easy to catch Qantas on the hop,'' said Deutsche Asset Management fund manager Shawn Burns.
"But it looks like Qantas is improving and things are now looking pretty even between them.''
It is too early to tell yet how much market share Qantas will be able to steal back from Virgin Blue when its own low-cost carrier, Jetstar, starts up in May.
Regardless of Jetstar, though, Qantas's mainline business seems to be getting better at getting on the front foot with Virgin Blue.
Last week was particularly tough for the airline founded by Richard Branson.
On Monday the Bureau of Transport and Regional Economics released its on-time performance data for the nation's airlines.
The results surprised the market by showing that Virgin Blue the airline that had pushed so hard for performance data to be released had actually slipped behind Qantas for the month of January.
Credit Suisse First Boston believes the drop in Virgin Blue's on-time performance compared with Qantas is a concern if it wants to increase its share of the high-margin business market.
Just as Virgin Blue appeared to have reassured investors that its slide its in-on time performance was a one-off occurrence, a problem with the airline's maintenance record system reared its head again.
Virgin Blue has voluntarily agreed not to register any new planes and suspend its extended-range twin-engine operations until the issue is sorted out.
That leaves it with one new plane on the ground unable to be certified to fly and more aircraft are on the way that will be similarly affected.
Both Virgin Blue and the Civil Aviation Safety Authority have gone to great lengths to assure the travelling public that the problem is not causing any safety issues for the airline.
But the negative publicity, coupled with a much stronger rival in Qantas, could be a sign that the rampant growth in domestic market share that Virgin Blue has experienced in the past few years will be much harder to achieve in future.
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